Automatic Stabilizers

Automatic Stabilizers. Automatic stabilizers are changes in government expenditure and taxation that automatically kick-in to help reduce the ups and downs of the business cycle.

Two key automatic stabilizers are income tax and unemployment benefits. During a recession, income falls and unemployment rises. As income falls, workers pay less in income tax, so there is less of a drain on consumption than there may have been. As unemployment rises, more people receive unemployment benefits, so consumption does not fall by as much as it would have. During a boom the opposite happens.